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August 30, 2013

Clients’ Kids Off to College? 5 New Risks, 6 Solutions for Parents

As students leave home for college this month, many wealth advisors can take pride in having helped the parents save and invest over their working lives to pay for the cost of an undergraduate or graduate education. At the same time, advisors have the opportunity to offer the parents, their clients, one last piece of advice: make sure you have protected your college savings and the other assets from the threat of a high-stakes liability lawsuit. A child away at college raises new and heightened possibilities for lawsuits that could come back to the parents’ doorstep.

Five Risky Situations

Here are a few high risk situations that warrant attention:

Lending cars to friends. A client’s child at college with a car may drive responsibly, but what about the fellow students who ask to borrow the car? In some cases, a student’s car becomes the house car, with the keys near the entry way for anyone else who needs it. Liability follows the car owner. If a student’s friend borrows the car and causes an accident resulting in serious injury, the student’s parents will likely find themselves first in line for a multi-million dollar lawsuit, especially if they have substantial assets.

Borrowing cars. If the client’s child does not have a car, he or she will likely want to borrow a friend’s. How well insured is the friend? If the child causes a serious accident and the owner has insufficient insurance, the insured party will target the child’s parents next.

Driving abroad. Many students take a semester of schooling abroad where driving laws and customs could differ greatly from those in the U.S. Driving in those unusual conditions puts the student at greater risk for an accident.

Hosting parties. There’s no way around it at college: parties happen. If the student lives off campus and hosts a party, the parent could be held responsible for a variety of tragic outcomes. In one case, a teen suffered permanent brain damage due to overdosing on prescription medications during a party at a friend’s house. The parents were held partly responsible for a $4.1 million settlement.

Social media misjudgments. The potential widespread distribution of social media posts and supposedly private text messages have greatly increased the risk of lawsuits claiming invasion of privacy, character defamation and more. In one case, a university student used a webcam to secretly film his roommate in embarrassing circumstances and then told others what he was seeing through social media. The roommate learned of the exposure and ultimately committed suicide, resulting in a criminal case against the student who did the filming. Many times, a civil case follows, seeking substantial damages.

Six Solutions to College-Child Liability Issues

To help their clients guard against the liability risks associated with a child going away to college, advisors can encourage them to take the following steps.

Education. Making the student aware of dangerous situations provides the first line of defense. Sit down with the student and explain the risks involved with lending a car to friends, borrowing a car, hosting parties, and carelessly using social media.

Monitoring. As President Ronald Reagan famously said during negotiations with the Soviet Union: Trust but Verify. To assure safe driving, clients could consider many new devices that monitor driving behavior. Some wirelessly transmit maximum speed, distance traveled, and hard breaking after each trip, allowing parents to catch bad driving habits and put the student on notice. If an accident occurs, data may prove beneficial in determining fault. Clients should also stay as connected as possible to their kids on social media platforms.

Auto/home/umbrella liability insurance. Clients should purchase enough liability coverage to match their net worth and future income. This usually involves buying the maximum amount of liability coverage in the auto and homeowner policies and then supplementing that coverage with an umbrella liability policy. Carriers that specialize in serving high-net-worth families typically offer umbrella liability coverage starting at $1 million and going up to $100 million.

Uninsured/underinsured liability insurance. This coverage ensures protection if the student is seriously injured and the person responsible has insufficient insurance to pay for damages. The student could be seriously injured while riding on the back of a friend’s motorcycle, and a friend’s parents might have no umbrella liability insurance. Overcrowded decks and balconies at a party could collapse, potentially injuring many students and quickly exceeding the liability limit for the property. Uninsured/underinsured coverage helps compensate for the other person’s lack of coverage.

Overseas coverage. If the student plans to drive a rented or borrowed vehicle while studying abroad, be sure to purchase liability coverage in the country, as liability coverage from the U.S. auto policy may not extend to the foreign country for rented or borrowed cars.

Name college residences on policies. While a dorm or off-campus landlord will likely have protection, it may not apply or suffice in all circumstances. Naming the student’s residence as an insured location on the parent’s homeowner and umbrella policies adds another level of protection, and usually costs next to nothing.

Given the complexity of risks associated with a child going away to college, the most important step wealth advisors can recommend to parents is to seek the advice of an independent insurance agent or broker. By raising parents’ awareness of the threats and then referring them to an insurance expert, wealth advisors can strengthen their overall client relationship by offering sound counsel at a major transition point in the life of any parent.